Research

I propose a new mechanism for sluggish wages based on workers' noisy information about the state of the economy. Wages do not respond immediately to a positive aggregate shock because workers do not (yet) have enough information to demand higher wages. This delayed response increases firms' incentives to post more vacancies, which makes unemployment volatile and sensitive to aggregate shocks. The model presented here is robust to two major criticisms of existing theories of sluggish wages and volatile unemployment, namely that wages are flexible for new hires and the flow opportunity cost of employment (FOCE) is pro-cyclicality. The model generates volatility in the labor market as well as wage and FOCE elasticities with respect to productivity that are consistent with the data.

Using a representative-household search and matching model with endogenous labor force participation, we study the cyclicality of labor market transition rates between employment, unemployment, and nonparticipation. When interpreted through the lens of the model, the cyclical behavior of transition rates implies that the participation margin is strongly countercyclical: the household's incentive to send the workers to the labor force falls in expansions. We identify two key channels through which the model delivers this result: (i) procyclical values of non-market activities, and (ii) wage rigidity. The smaller the value of the extensive-margin labor supply elasticity is, the stronger the first channel is. Wage rigidity helps because it mitigates increases in the return to market work during expansions. Our estimated model replicates well the behavior of transition rates between the three labor market states and thus the stocks, once both features are in place.

We provide a structurally estimated time series for the degree of nominal price rigidities in the United States between 1978 and 2023. To model the price rigidity, we allow for stochastic state dependence in both the timing of price changes and the choice of what price to charge. We give a cost-based micro-foundation to this stochasticity, modeling firms that face information costs and menu costs when making decisions regarding their prices. Estimating the model on time series of moments from the distribution of price changes over time–in addition to time series of real economic activity and inflation–we find considerable monetary non-neutrality with medium-cycle volatility. Underlying our estimated series are a number of results that shed new light on the sources and dynamics of price rigidity. In particular, the model attributes most of the rigidities in price setting not to infrequent, but rather to inaccurate price adjustment. The timing of adjustments has been accurate, especially for price decreases. Menu costs have been small but growing. Information frictions are large and volatile. This volatility has implications for the trade-offs involved in monetary stabilization policy

The deep deterioration in the labor market during the Great Recession, the subsequent slow recovery, and the missing disinflation are hard to reconcile for standard models. We develop and estimate a New-Keynesian model with search and matching frictions in the labor market and endogenous intensive and extensive labor supply decisions. We conclude that the estimated (i) combination of low degree of nominal wage rigidities and high degree of real rigidities and (ii) low role of pre-match costs relative to post-match costs are key in successfully forecasting jointly the slow recovery in unemployment and the missing disinflation in the aftermath of the Great Recession. We find that endogenous labor supply data is very informative about the relative degree of nominal and real wage rigidities and the slope of the Phillips curve

I study the business cycle properties of wage posting models with random search, for which the distributions of employment and wages play a nontrivial role for the equilibrium path. In fact, the main result of this paper is that the distribution of firms is one of the most important elements to understand business cycle fluctuations in the labor market. The distribution of firms (1) determines which shocks are relevant for the labor market, (2) implies that wage rigidity does not significantly amplify shocks, and (3) puts discipline on the relative value of the flow opportunity cost of employment. To assess these type of models quantitatively, I propose a new algorithm that finds the steady state and computes transitional dynamics rapidly. Hence, integrating wage posting models with random search to larger models becomes possible (and easy) with this new algorithm.

Models with information frictions display output and inflation dynamics that are consistent with the empirical evidence. However, an assumption in the existing literature is that pricing managers do not interact with production managers within firms. If this assumption were relaxed, nominal shocks would not have real effects on the economy. In this paper, I present a model with perfect communication within firms in which nominal shocks have real effects. In this model, intermediate goods firms accumulate output inventories, observe aggregate variables with one period lag, and observe their nominal input prices and demand at all times. Firms face idiosyncratic shocks and cannot perfectly infer the state of nature. After a contractionary nominal shock, nominal input prices go down, and firms accumulate inventories because they perceive some positive probability that the nominal price decline is due to a good productivity shock. This prevents firms' prices from decreasing and makes current profits, households' income, and aggregate demand go down. According to my model simulations, a 1% decrease in the money growth rate causes output to decline 0.17% in the first quarter and 0.38\% in the second followed by a slow recovery to the steady state. Contractionary nominal shocks also have significant effects on total investment, which remains 1% below the steady state for the first 6 quarters. I show that if firms make investment decisions and if their nominal input prices and demand do not perfectly reveal the state of nature, the economy exhibits money non-neutrality even under flexible prices and perfect communication within firms.